Private debt market opens up for SMSFs

Fixed income investment specialist FIIG Securities has completed the inaugural deal for its new FIIG Private Debt division, with self-managed super funds participating in the syndicate alongside high net worth individuals, a family office and a credit fund.

The $20 million loan was to a “well-established player” in the receivables management industry (small business factoring and invoice discounting). FIIG says the borrower requested that its identity be withheld.

FIIG says it is targeting debt investments worth between $10 million and $50 million, including senior, junior and mezzanine debt. The funds will be sourced from FIIG clients. The new business complements FIIG’s corporate bond division, which involves arranging bigger deals.

The director of the division, Erryn Lloyd-Jones, says: “This deal highlights the high quality investment opportunities becoming available due to the dislocation created by banks rationing credit.”

Lloyd-Jones says his team aims to deliver several new transactions each year, targeting internal rates of return in the range of 8 per cent to 20 per cent. The minimum investment is $500,000.

“The team is focused on extracting a return premium for the illiquidity currently exhibited in the Australian corporate and property debt markets, due to reducing local bank funding and lower risk appetite generally.”

FIIG is not the only investment group getting into the private debt market, although it may be the only one doing it through small-scale syndications. Three debt funds have listed on the Australian Securities Exchange over the past year – Neuberger Berman’s NB Global Corporate Income Trust, Gryphon Capital Investments’ Gryphon Capital Income Trust, and Metrics Credit Partners’ MCP Master Income Trust.

NB Global Corporate Income Trust, invests in a portfolio of global high yield bonds. These are non-investment grade securities, with a focus on B and BB rated bonds. The manager is targeting monthly distributions equivalent to at least 5.25 per cent per annum, with modest growth in asset value over time.

Gryphon Capital Income Trust invests in a portfolio of floating rate asset-backed securities and residential mortgage-backed securities (RMBS). The target return is 3.5 per cent above the cash rate. The portfolio will be actively managed and securities will generally have floating interest rates.

Securities in the fund include debt issued by investment grade and non-investment grade companies. At June 30, there were 82 individual investments with 73 per cent in investment grade assets (rated BBB and above).

The emergence of these funds over the past year is no coincidence. A range of regulatory reforms has opened up the Australian credit market to non-banks lenders. One important change is tighter capital requirements for banks.

Higher capital levels for business and corporate loans are a permanent feature of the banking market. Bank risk appetite is not going back to what it was.

Andrew Lockhart, the managing partner of Metrics Credit Partners, says banks have been reducing their exposure to a number of areas, such as commercial real estate and development finance.

“As a result, we can take less risk on the loans we do and earn a higher margin,” he says.